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Long-Term Behavior of Yield Curves

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Abstract

The flattening of yield curves at long-term maturities is proven to be approximately proportional to the reciprocal of the time to maturity under general conditions. This is a consequence of the persistence of earlier forward rates in the averaging process, which produces yields from forward rates. This relationship suggests the use of a “reciprocal maturity yield curve,” which significantly facilitates the interpretation of the behavior of long-term yields by linearizing them for display over a shorter interval. This is illustrated using a yield curve for U.S. Treasury bills.

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D. R. Chambers ; W. T. Carleton ; and D. W. Waldman . “A New Approach to the Estimation of the Term Structure of Interest Rates.” Journal of Financial and Quantitative Analysis, 19 (091984), 233252.

M. B. Livingston Flattening of Bond Yield Curves.” Journal of Financial Research, 10 (Spring1987), 1724.

M. B. Livingston , and S. K. Jain . “Flattening of Bond Yield Curves for Long Maturities.” Journal of Finance, 37 (031982), 157167.

J. H. McCulloch Measuring the Term Structure of Interest Rates.” Journal of Business, 44 (011971), 1931.

C. Nelson , and A. F. Siegel . “Parsimonious Modeling of Yield Curves.” Journal of Business, 60 (101987), 473489.

G. S. Shea Pitfalls in Smoothing Interest Rate Term Structure Data: Equilibrium Models and Spline Approximations.” Journal of Financial and Quantitative Analysis, 19 (091984), 253269.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
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